"PI insurance is no magic wand for FSCS funding"
Sometimes it can be useful to mix metaphors in order to make a point and, in the case of the FCA’s current review of the FSCS funding, I believe it is absolutely essential.
While speculating in the Consultation Paper about the possibility of forcing changes on professional indemnity (PI) insurers may be a genuine attempt to broaden the debate, it is, at best, unhelpful and, at worst, an unnecessary complication that demonstrates a misunderstanding of the way the PI insurance (PII) market works.
On the face of it, the suggestion of enforcing PI insurers to provide broader cover might look attractive
Unfortunately, however, the PII market relies on individual insurers risking their backers’ hard cash by providing cover that delivers a reasonable balance of risk and reward. The moment you attempt to force the insurers to accept risks they don't wish to cover, they will simply exit the market completely.
On the face of it, the suggestion of enforcing PI insurers to provide broader cover might look attractive.
Are the memories of the regulators and the Treasury so short as to have forgotten the lessons of 2002/3 when the PII market virtually ceased to function for the IFA sector? The result was that between 2000 and 3000 firms regulated by the FSA were priced out of the market by hikes in premiums of tenfold or more. So dramatic was the withdrawal of PI insurers from the market that, despite it being a legal requirement under the FSA's rules for a firm to carry appropriate PI insurance, the regulator turned a blind eye to firms who were unable to obtain cover.
This logjam was only broken when, in mid-2003, SimplyBiz, through a reinsurance mechanism, offered to underwrite 95 per cent of the PI risk for directly regulated firms. The success of this creative solution was, I am delighted to say, acknowledged by the FSA in a 2003 Consultation Paper.
This ultimately led to the development of a more stable and competitive PII market which, while still not without cost, has served advisers and consumers reasonably well in recent years. It would be a sorry outcome of the FSCS funding review if we create a much fairer funding method only to end up with ridiculously expensive PII costs for advisers. I urge the Treasury and the FCA to keep their focus on restructuring the current system to eliminate its grotesque unfairness to IFAs, rather than chasing red herrings through ever muddier waters.
Ken Davy is chairman of SimplyBiz